The SEC cannot win every case

Just because the Securities and Exchange Commission (SEC) brings an insider trading case, that does not mean it will win.

Last week, a federal court jury in New York City cleared Nelson J. Obus, manager of a hedge fund, and two other men, of insider trading allegations.

The jury of five men and five women reached their verdict in a civil case after about a day of deliberations and a trial that lasted two weeks.

The jury verdict also comes soon after SEC Chairman Mary Jo White made public statements that the commission will take more difficult cases to trial.

In considering the verdict, David Parker, a litigator and risk manager at Kleinberg, Kaplan, Wolff & Cohen, who counts a number of hedge funds among his clients, said the Obus case was different from many of the recent cases brought by the government.

“Many of the cases we’ve seen recently are cases where the government has fairly hard evidence, including a pattern of trades following an alleged tip,” Parker told InsideCounel in an interview. “You didn’t have that here.”

The government claimed Obus received the information and some two weeks later he made the trades. In many other cases, trades are made in minutes, or even a single minute, after information is received.

Obus apparently spent millions of dollars and several years working to clear his name. He had the time and resources to do it, but that is not always the case with other defendants, sources said.

Defense attorneys who handle such insider trading cases likely will review how the Obus case was won by Joel Cohen and other members of the legal team. There was not a unique legal theory raised in the case, it was more Obus’ attorneys being able to sway the jury.

Some attorneys are also cautioning not to read too much into the SEC defeat in the case. It was not a signal that the SEC cannot win a case, it was a tough case to prove, and the allegations were made several years before the case was brought to trial. The SEC sued the defendants in 2006, but the judge threw out the case in 2010, a ruling that was later overturned by an appeals court, according to InsideCounsel.

"Obviously, I'm gratified that the jury saw through the SEC's 12-year campaign of regulatory overreach and recognized that we have told the truth," Obus said in a statement quoted by The Wall Street Journal. "But this isn't only about me. This is about systematic regulatory overreach without accountability."

The New York Times also quoted Obus, saying to SEC lawyers shortly after the verdict, “If you had been doing your job this never would have happened. I’ve had my whole life wrapped up in this.”

Obus clearly wanted to prove his innocence no matter the cost involved.

“We need to assure the business community that regulators can’t wrongly force small enterprises to settle, or falsely admit guilt,” Obus said in a statement quoted by The Times.

Eugene I. Goldman, a former senior counsel in the SEC's Division of Enforcement, who is now a partner at McDermott Will & Emery, pointed out to The Journal, too, that during the trial Obus testified, denied the government’s allegations, and “came with his own reasoning for the trading."

In a statement, John Nester, a spokesman for the SEC, said, "Although we are disappointed, we respect the jury's verdict."

The government alleged Obus received inside information that SunSource, which makes nuts and bolts, was to be acquired by Allied Capital Corp. Obus purchased stock in the company, and earned $1.3 million for his hedge fund when SunSource's shares jumped in price, the SEC said.

Two witnesses said in depositions that Obus had told them he was given information about SunSource. Paul Kisslinger, the SEC’s lawyer, told jurors that Obus told SunSource’s CEO that “a little birdie” at General Electric Capital Corp. had told him about the sale to a “financial buyer,” Bloomberg News reported.

The SEC also sued the “little birdie” referred to in the case who authorities claimed was Brad Strickland, a former GE Capital underwriter. The SEC also sued Peter Black, a former analyst for Wynnefield. The SEC claims Strickland told the information to Black, who then told the information to Obus. The three defendants denied wrongdoing, and were each cleared by the jury last week.